Within the space of just 24 hours, sentiment took a 180-degree turn. We already had a potential view on how 2020 will look and how volatile could be this year because of increased positioning, too optimistic sentiment and stretched valuations.
The market has been sold with very high volumes on Friday and VIX was up 30% around midday. Oil & Gas and the defensive Food & Beverages were the only sectors in the green.
The headlines we got on Iran/US were that biggest escalation we have seen in more than 2 years and must have changed some confidence into markets.
This morning European markets are indicated down 0.6/0.7% (already negative Ytd) after a negative performance in Asia (Nikkei -2.3%, Hang Seng -1%)
Gold is up already 3.7% Ytd breaking the resistance at 1550$ while Crude oil is up 5.3% breaking 64$. As you know, we suggested to be long Gold and Oil names already a month ago.
Macro-wise, last Friday we had an awful December US ISM unexpectedly falling to the lowest level since the Great Financial Crisis. Weak Manufacturing activity is definitely not a news, but no one expected such a softness. The December ISM Manufacturing fell to 47.2 vs 49 consensus vs 48.1 prior month, marking the eight decline in the last nine months.
In aggregate ISM signals contraction for the fifth straight month. The deterioration was driven by the weakest gauges of new orders (which is typically forward looking) and production since April 2009. Also, to note that the ISM index averaged 51.2 for 2019, the lowest reading in the past 10 years.
The correlation between the ISM and S&P is now broken
The December’s ISM is the evidence that it will take more than just positive trade news and market sentiment to lift manufacturing activity in the US. Only a removal of tariffs could considerably lift manufacturing, not just an end to escalation.
Just to mention, a larger acceleration in German inflation in December 1.5% vs 1.2% YoY, mainly driven by energy prices. Then core inflation is still set to remain subdued, far below ECB goals. With the economy suffering from the weakness in manufacturing, domestic price pressures are unlikely to increase much.
As we expressed several times, we believe that Equity is the asset class where to be invested but it is not going to be a smooth sailing like we had in 2019, Investors will need to use the increased volatility as an opportunity to reduce/increase the exposure.
We also believe that Gold is an asset class where investors should hold between 3% and 7% of their portfolios depending on price and market conditions.
January and February are statistically two very strong months for gold and the recent geopolitical events have been the new spark for a potential break of 2019 highs at 1550$.
Please note that today all markets are open with the exception of Greece, Sweden, Finland and Poland.